CHAPTER 6
RETURN ON SERVICE AND RELATIONSHIPS

“Customers look for value. However, more value does not necessarily require new services but better service, meaning that all existing customer contacts are managed as value-supporting service for customers.”

INTRODUCTION

Building on the discussions of perceived service quality and relationship quality in Chapter 4 and quality management in service in Chapter 5, this chapter now turns to the question of whether investing in service can be expected to pay off. The issues of relationship costs and long-term customer sacrifice are discussed, and various approaches to understanding customer perceived value are described. Then a model of reciprocal return on relationship (ROR) and metrics for calculating this ROR are presented. Finally, a model of customer relationship profitability is presented. After having read the chapter, the reader should understand how to justify investments in service quality and in service in customer relationships, and how to quantify the total benefits of a service offering as well as how reciprocal ROR and the profitability of customer relationships are calculated.

WHY CUSTOMERS ARE NOT PREPARED TO PAY FOR IMPROVED SERVICE QUALITY

Service competition is a fact for a growing number of firms and industries. Service firms have always faced service competition, whereas this situation is less familiar for most manufacturing businesses. In spite of this new competitive situation, one often meets the sceptical suspicion that, in the final analysis, developing service and capabilities to cope with service competition will not pay off after all. ‘Customers are prepared to pay only for the core solution, a physical product or a service’ and ‘For our customers price is the only important factor, so it is no use to invest in services’ are arguments which are frequently heard. In some situations, and for some customers, they may of course be true. However, in general they are certainly not valid. Improved service and the development of sustainable customer relationships usually pays off. The problem for most firms is that many customers, individual consumers as well as organizational, do not see how improved service means more value for them. The service provider has to make customers realize the value-enhancing potential of better service.

If customers do not appreciate the value to them of good service and are not willing to pay for service, there can be at least four reasons for this:

1. The service provider has not been able to demonstrate to its customers how they can benefit from the service offered in terms of added comfort, support, security, wealth and/or lowered costs.

2. The service provider has not managed to show the customers that long-term cost effects of a service offering are a more important decision-making criterion than price.

3. The service offering is not as customer-centric as it should be and does not offer the favourable benefits that customers are looking for.

4. A particular customer is not interested in value-enhancing additional services but is only looking for the core solution at as low a price as possible.

In this chapter we discuss how to cope with the first two reasons given above. The third reason is discussed in other chapters throughout the book. The fourth reason is not discussed in this context: a firm that has done its market research carefully enough should realize that such customers are in a transactional mode (see Chapter 2) and they should not be offered a total service offering at all but merely the core solution they want.

THE COST OF IMPROVING SERVICE QUALITY

Managers often feel uncomfortable at customer demands for better quality. They feel that improved service quality does not pay off. Two reasons why the firm cannot improve its quality are normally offered: improving quality costs more than can be achieved in additional revenues and new business, and improving quality means that productivity will suffer, which the organization cannot afford. Managers tend to believe that quality improvements come at the expense of productivity, and vice versa. Caught in this apparent dilemma, they often choose to concentrate on one of these issues.¹ Far too often attention to productivity is given priority, and how to improve quality remains an unsolved problem. In Chapter 9 the issue of productivity in service is discussed in some detail, and it is shown that, although it may be true for some firms, as a general rule productivity and quality do not counteract each other.

Both of these reasons for why quality cannot be improved are cost-related. To improve service and increase their quality requires too many resources and additional costs, and supposedly lowers productivity, which leads to higher costs per unit produced. Both reasons are invalid, and are based on an insufficient understanding of the relationships between quality and productivity on the one hand and the use of resources and the sources of costs and revenues on the other. Efforts to raise quality almost always result in better productivity and efforts to raise productivity can very well pay off through better quality. However, in order to achieve positive results, managers will have to rethink the relationship between costs and revenues, productivity and quality (see Chapters 1 and 8). If managers are able to define these relationships, they are probably able to exploit their strengths as far as production effectiveness, employee satisfaction and profitability are concerned.

QUALITY DOES NOT COST: A LACK OF QUALITY DOES

The belief that high quality implies higher costs is not based on fact. Normally, it is the other way around. Frequently the more important issue is that a lack of quality costs money. Philip Crosby coined the phrase ‘quality is free’.² He based his statement on the notion that firms spend more than 20% of their sales revenue doing things wrong and then having to correct these mistakes.

These are facts from manufacturing. However, service organizations are probably no better. On the contrary, it has been suggested that up to 35% of their operating costs may be due to a lack of quality, having to repeat tasks and correct errors. This, of course, follows from the fact that service quality is a complicated phenomenon and that it is more difficult to monitor and assure quality in service than in manufacturing. Furthermore, manufacturing has a long history of quality control research and a whole collection of quality monitoring techniques, quality assurance and total quality management at its service.

Hence, improving quality by creating customer-oriented and foolproof systems and by training employees well is a way not to increase costs, but to get rid of unnecessary costs. If we assume that 35% of operating costs are unnecessary, because they are due to bad quality, quality improvement by removing these quality problems would save 35% of these costs. All of this would be visible on the bottom line. However, such an improvement would not go unnoticed by the market, and new business and additional revenues could be expected to be achieved. This would add even more to the bottom line, thus profits would be boosted by more than 35% of the original operating costs. Furthermore, if the firm spends this 35% on further improving quality, operating costs would remain on the same level as they were originally. This quality improvement process could be expected to bring in more business and perhaps, even probably, enable the firm to get a better price for its service. The effects on the bottom line are obvious.

BETTER QUALITY, HIGHER CUSTOMER RETENTION RATES, MORE PROFITS

Service is inherently relational. This does not mean that some service providers could not develop their marketing strategy in a transaction-oriented fashion. However, there is always the possibility for the development of customer relationships in service. Relationships between service providers and consumers and users of services normally continue over time. Hence, we start our analysis of return on service and relationships by discussing the effects of good service on customer retention and loyalty,³ and the economic consequences of longer customer relationships.

What ‘good service’ means is a strategic issue. In many cases it means that the service is excellent in comparison with competing offerings and meets customers’ expectations and other comparison standards. If this is the case, good service means that the service is genuinely good. However, in other cases it may mean a lower level of service, because the target group of customers may be looking for a lower quality level, for example because the correspondingly lower price better fits their budget. Then the lower level is ‘good service’ for those customers. For example, a couple spending the evening at a gourmet restaurant consider the quality of the restaurant service good if it meets their expectations of good food, attentive waiting staff, and so on. However, if the performance of a fast-food restaurant meets the different expectations they have when visiting such a restaurant, in a relative sense they will consider the quality of the service equally good.

THE RELATIONSHIP BETWEEN CUSTOMER SATISFACTION AND REPURCHASES AND LOYALTY

Even though a positive relationship between satisfaction with service and goods quality, on the one hand, and customers’ willingness to continue the relationship or make repurchases, on the other, seems to exist, it is important to realize that this function is normally far from linear. Experiences from Xerox reported by Hart and Johnson⁴ (see Figure 6.1) clearly indicate that there is a substantial zone of indifference including customers who claim that they are everything from ‘so-so satisfied’ to ‘satisfied’. Only the ‘very satisfied’ customers show a high repurchasing rate and a high propensity for positive word of mouth. As the figure shows, the retention curve rises steeply at this point of the satisfaction scale. Evidence from other types of both goods and services supports these observations. Two obvious conclusions can be drawn from this:

• It is not enough to offer the quality of service that keeps customers in this zone of indifference as far as repurchasing behaviour is concerned; customers have to be offered a service offering which makes them very satisfied before they will repurchase. Therefore it is important to surprise customers in such a way that their quality perception is satisfactory enough to reinforce loyalty and make them repurchase.

• When reporting results from customer satisfaction and service quality studies, it is extremely important to keep those respondents who report that they are very satisfied apart from those who say that they are simply satisfied. The repurchasing and word-of-mouth behaviour, and therefore also the actions required to ensure enduring customer relationships, are totally different for these two groups of customers (normally, the responses of these two categories of customers are reported jointly in the ‘satisfied or very satisfied’ category. By so doing, the firm loses vital information needed to create profitable customer relationships.)

FIGURE 6.1

The satisfaction/repurchase function.
Source: Hart, C.W. & Johnson, M.D., Growing the trust relationship. Marketing Management, American Marketing Association, Spring; 1999: p. 9. Reproduced by permission of the American Marketing Association.

Hart and Johnson⁵ draw the conclusion that a firm has to go beyond what normally can be described as good service to create loyalty. The firm must serve customers in such a way that they realize that the firm can be trusted in every respect at all times. This means that the firms should deliver consistently good service.

Another interesting conclusion that can be drawn from Figure 6.1 is the effect of customer satisfaction on word-of-mouth communication. Only very satisfied customers will engage in any substantial positive word-of-mouth endorsements and thus become ‘unpaid’ marketing and sales persons for the firm. On the other hand, very unsatisfied customers can be expected to create substantial negative word of mouth, and thus become ‘terrorists’ reinforcing negative but not totally unsatisfactory experiences by other customers and scaring away potential new customers. The development of social media makes such effects much more far-reaching than ever before.

Furthermore, there are indications that firms gain a larger share of customers’ spending in their category if the customers are very satisfied with the service they have experienced than if the customers are less satisfied.⁶

In conclusion, there are a number of reasons why a firm should strive to provide consistently impeccable service.

THE RELATIONSHIP BETWEEN CUSTOMER LOYALTY AND PROFITABILITY

The largest published study of higher customer retention levels following better service quality and how this affects profit is one by Bain & Company. Although it is not new it is still very relevant. In this US study several service industries were studied. The effects on profits through improved customer retention and hence longer relationships with customers are astonishing. It was found, among other things, that the average profit per customer grew constantly over the first five years.

The reasons why the profit per customer increases over time are illustrated schematically in Figure 6.2. The economic effect of customer loyalty can be attributed to the following factors: acquisition costs, revenue growth, cost savings, referrals and price premiums.⁷

The vertical axis in the figure does not have a scale, because the effects on profits of the various factors differ from industry to industry, firm to firm, and even customer to customer. However, the height of the sections gives some general indications of the relative importance of these factors. Every firm should, however, take the time and trouble to study its accounting and reporting system in order to make the necessary calculations of the influence on total profits per customer of these and possibly other profit drivers. Because in most firms the figures needed are not readily available, this can be a time-consuming task. Revenues and costs are usually registered on a per product basis, not on a per customer basis. These factors are discussed below.

Acquisition costs. The active acquisition of new customers using sales and external marketing efforts is required in most businesses. As a rule of thumb, getting a new customer costs five to six times more than it costs on top of normal service operations (sales calls, providing information about new goods or services, etc.) to keep an existing satisfied customer. In other words, to keep an existing customer it costs only 15 to 20% of what has to be invested in getting a new customer. The economics of customer loyalty are very apparent. These figures of course vary from industry to industry, and situation to situation, but are nevertheless remarkable. In Figure 6.2 the acquisition cost per customer appears as a negative profit effect in the year before the customer relationship starts.

FIGURE 6.2

The profitability effect of loyal customers.
Source: Reichheld, F.F., The Loyalty Effect. The Hidden Forces Behind Growth, Profits, and Lasting Value. Boston, MA: Harvard Business School Press, 1996. Reproduced by permission of Harvard Business Review.

Base profit. In many service industries the price paid by customers during the first year or even first few years does not cover the costs of producing the service. In other cases the price covers costs and produces a profit per customer from the first year. This is the base profit in the figure. After some years, depending on the industry and other factors, the accumulated base profits have covered the initial marketing costs of getting the customer.

Revenue growth. In most situations a long-standing customer will bring more business to the same service provider. This means that, on average, customers can be expected to contribute more to a firm’s profits as the relationship grows. The annual revenue per customer increases over the years, thus contributing to growing profits.

Cost savings. As the service provider and the customer learn about each other, about what to expect and how to perform, service processes will be smoother and take less time, and fewer mistakes that have to be corrected will be made. Thus, the average operating costs per customer will decrease, which in turn has a positive impact on profits.

Referrals. Long-standing and satisfied customers will create positive word-of-mouth communication and recommend the supplier or service provider to friends, neighbours, business associates and others. The customer takes over the role as marketer without any additional costs to the firm. A large number of businesses, especially smaller ones, thrive on good referrals by satisfied customers. In this way new customers are brought in with lower than normal acquisition costs, which has an extra favourable effect on profits.

Premium price. In many business, old customers pay a higher price than newcomers. Discounts that were initially given to new customers do not exist for older customers. In many cases introductory offers decrease prices for new customers. However, the main reason for the premium price effect can be attributed to the fact that long-standing customers realize the value provided by the firm and make cost savings by using the service of a service provider they know well. We shall return to this later in the context of relationship costs. In summary, this value offsets the negative effect of higher prices. Of course, it is not always the case that old customers pay a premium price. Sometimes long-lasting relationships have given the customer a bargaining position based on power or social relationships which keeps prices down. If this happens, a negative, profit-eroding effect occurs.

In the study by Bain & Company the economic effects of higher retention rates were calculated in the service industries studied. These results were also quite astonishing. In general, it was found that as the customer defection rate falls (i.e. as customer retention grows), profits increase. The variation between the industries in the study was remarkable. In retail banking at the time of the study operations profits improved by 85% as the customer defection rate decreased by five percentage points. Over the service industries in the study the impact on the economic result of a decrease of the defection rate of this magnitude varied between 25% and 85%.⁸

Again, the economics of customer loyalty are quite obvious. However, almost always separate studies of the revenue and cost flows are required, because accounting systems seldom produce the information needed for such calculations. The growth in customer retention rates and customer loyalty is probably not just caused by improved service. However, it is apparent that customer satisfaction with service quality is a central factor here. On the other hand, it is also clear that satisfaction as such does not necessarily create loyal customers. The sacrifice made by customers, in terms of price, comfort, timeliness and relationship costs, which may follow from these and other factors, as well as the value customers feel they get, are critical variables affecting loyalty and the length of customer relationships.

In the next sections we shall first discuss how to analyse customer sacrifice and then the customer-perceived value of service in a relationship.

CUSTOMER SACRIFICE: THE COST OF BEING A CUSTOMER

The view that improved service does not pay off for the service provider or for the customer is expressed quite regularly, as we have seen above. Nevertheless, as a general rule this is not true. Except for special cases, for example with highly transaction-oriented customers, there is always an opportunity to increase customer value and strengthen relationships with customers, if the service provider understands the nature of service competition and the cost consequences for customers of good and bad service. One has to realize that bad service creates costs for customers, and good service makes such costs decrease or eliminates them.

The usual problem is that marketers, salespeople and buyers think in terms of short-term exchanges or transactions, and they are therefore preoccupied with short-term sacrifice, or the price to be paid. Because the accounting systems of both the seller and the buyer are normally geared towards registering transactions and not towards following up on costs and revenues caused by suppliers, service providers and customers, neither party realizes the long-term cost effects of bad service; nor do they see the long-term gains of good service. Unnecessary costs caused by bad service and the cost gains of good service occur for the customer as well as for the service provider. In this section we shall concentrate on the effects on customers. Later on, effects on the supplier or service provider will be discussed.

Price is only a part of the total long-term cost of being a customer of a given service provider. Price, including discounts and terms of payment, is a cost component which occurs in the short run, whereas other cost components occur in the long run as the relationship unfolds. Thus, the total long-term customer sacrifice consists of price and additional costs occurring in the relationship. These additional costs are called relationship costs.⁹ Hence, it is important to make a distinction between short-term and long-term sacrifice:

• Short-term customer sacrifice: price.

• Total long-term customer sacrifice: price, relationship costs.

Relationship costs are the additional costs on top of price that occur for a customer due to the fact that he has purchased something from a given supplier or service firm and entered into a relationship with this organization. The relationship costs are of three different types:¹⁰

1. Direct relationship costs.

2. Indirect relationship costs.

3. Psychological costs.

In the following sections these types of relationship costs will be discussed in more detail. Such costs occur in relationships with individual consumers and households as well as in business-to-business relationships. It may be easier to calculate them in the latter type of relationship, but they exist for individual consumers too.

DIRECT RELATIONSHIP COSTS

Direct relationship costs are costs that depend on the processes that the customer has to maintain because of the solution offered by the supplier. Such costs consist, for example, of investments in office space, additional equipment, personnel and software and depreciation costs over time. Direct relationship costs can be calculated either as gross or net costs. Gross direct costs are the total costs if the customer decides to purchase the solution offered. Net direct costs are any additional costs which are less than optimal from the customer’s point of view. Both ways of calculating this cost component give the same result. A net calculation may be more useful when comparing two or more competing offerings, whereas a gross calculation gives more appropriate information when following up on the total long-term sacrifice in a given relationship with a supplier or service provider.

For example, Xerox once dominated the market in photocopying machines, and offered a service system that was efficient from Xerox’s perspective. However, as the Japanese started to introduce photocopying machines that required little servicing, a new standard for optimal service costs was established. Any supplier who provided a solution that required higher service costs caused unnecessary direct relationship costs for the customer. Now, with digitized and computerized office systems there is a move back to favouring Xerox. A classic example of how to manage direct relationship costs is just-in-time logistics. By offering a delivery system that enables a customer to keep a minimum number of items in stock, a supplier can minimize the customer’s need to keep capital tied up in inventories and also make it possible for the customer to invest in smaller and probably less expensive facilities. All this decreases the direct relationship costs of being a customer of this particular supplier, and that way the total long-term customer sacrifice also decreases. To take another example, in a relationship where an advertising agency requires the customer to add an additional person to its marketing staff, the extra cost for this person is a direct relationship cost.

A competitor who can offer a just-in-time delivery system that enables the customer to keep an even smaller inventory buffer, or can offer the same advertising services but without requiring the customer to tie up one person in the relationship, helps customers to decrease their long-term direct costs. If everything else is equal, these competing offerings mean more value for customers, because they involve less long-term sacrifice.

INDIRECT RELATIONSHIP COSTS

Indirect relationship costs caused by a relationship with a given supplier or service firm are due to the amount of time and resources that a customer has to devote to maintaining the relationship in case it does not function as it should. Hence, they are unexpected and unwanted costs. Standstill costs or other quality costs that follow from delays or low-quality repair, maintenance and delivery services or from goods and service that do not function as they are supposed to also cause indirect relationship costs. Complaints always cause such costs. On the other hand, a quick and well-managed service recovery is considered value-supporting by customers, because it keeps down indirect relationship costs caused by a service failure, mistake or other quality problem.

The less a supplier can be trusted to keep delivery times, or the more problems there are with maintenance service, invoices and other documents, the more resources the customers have to devote to the relationship. Documents have to be checked, re-checked, phone calls have to be made, e-mails have to be sent, complaints have to be filed and followed up, more checking is required and more phone calls and e-mails are needed, and so on. These costs are indirect relationship costs, because they are not directly due to the flow of the relationship, but to unnecessary and unwanted deviations from the intended processes.

The additional costs caused by this are often significant. Sometimes one or more employees have to spend a considerable amount of time taking care of problems like these, which are all caused by an unreliable supplier or service provider. Temporary personnel may have to be hired or additional personnel added. However, far too often the reasons for these costs go unnoticed by management. The internal report systems seldom show that such additional costs are caused by the poor service of a given supplier; hence, management is not alerted. Another type of indirect relationship cost is standstill costs, and the costs of lost business due to the poor service of a supplier; for example, late deliveries. Such costs can grow very high.

A competitor who provides higher quality service to the buyer creates less pressure, fewer problems and also minimizes standstill costs and other quality costs. Thus, the indirect relationship costs are lower. A company that can demonstrate to the customer that it can provide a service offering at such a quality level that indirect relationship costs are kept to a minimum will be able to show the buyer that in the long run it can support more value for the customer.

PSYCHOLOGICAL COSTS

Psychological costs are caused when the staff of a firm feel that they cannot trust a supplier or service provider. They worry about the relationship and feel that they have to take action to ensure acceptable service. They feel insecure and lack control. Their mental capacity to perform other tasks is constrained to some extent. They feel that they have to use some of their time to check that everything is in order with the supplier, that deliveries will not be delayed, that maintenance will take place as scheduled, and that complaints will be attended to in a timely and appropriate way. As a result, decisions are perhaps not taken as promptly as they should be or implemented as swiftly as intended, some tasks may be postponed or even forgotten, etc. This may again lead to indirect relationship costs in the form of increasing overtime, the need for part-time manpower, lost business opportunities, etc. Psychological relationship costs for a customer are not always measurable, but they are always felt by those who suffer from having to cope with suppliers or service providers who provide bad service, and they often create unnecessary additional measurable indirect relationship costs.

As general guidelines of how to handle the various kinds of relationship costs, the following advice can be used:

• Direct relationship costs: minimize investments and out-of-pockets costs required by the relationship.

• Indirect relationship costs: eliminate unexpected and unwanted costs occurring due to mistakes and quality problems, lack of information and service failures.

• Psychological costs: avoid causing a feeling of lack of control and other reasons for being worried.

PRICE, RELATIONSHIP COSTS AND TOTAL LONG-TERM COSTS AND SACRIFICE

Relationship costs – direct, indirect and psychological – are equally as important as the price paid for the buyer. Frequently, firms do not realize this and focus on the singular transactions and the cost of singular exchanges. The price becomes the only cost component they consider. However, price is only the short-term sacrifice for the customer, whereas what is interesting for a customer from a business point of view should be the long-term sacrifice:

Because of relationship costs, direct as well as indirect costs, the long-term sacrifice easily grows even far above the short-term sacrifice. To see this one has to take a long-term view of total costs. In Figure 6.3 the formation of total costs in a relationship is illustrated schematically.

The total cost or sacrifice over time may be much higher than price, as is indicated in the figure. Regardless of how high a proportion of total long-term cost is relationship cost, using price as the main or sole criterion for purchasing decisions is always misleading. When a buyer is evaluating the value of competing offerings, in addition to price the net present value of relationship costs that can be expected to occur over time should be calculated. As is illustrated in Figure 6.4, from a long-term perspective a lower price offering may well lead to higher total long-term costs than a higher-priced product. This should not come as a surprise, because a lower level of service is probably the reason why one competitor is able to offer a lower price. In the end this lower service level will, however, cause added relationship costs. Moreover, additional service that the customer may need over time is normally not included in the price. Hence, the customer will have to pay extra for such service.

The seller should always calculate what level of relationship cost, both direct and indirect and also psychological, can be expected to occur for a potential customer, to put price in a long-term cost perspective. This is a way of not only helping buyers to make better decisions, but also of justifying a higher price for better service. By carrying out such long-term cost calculations the seller can put a value on the service he provides, which the buyer can understand and appreciate.

FIGURE 6.3

Relationship costs for the customer and their effect on total costs.
Source:Grönroos, C., Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum, 1992, p. 133.

FIGURE 6.4

Price, relationship costs and total long-term costs of two offerings.

Going beyond costs and also taking into account the effect of an offering on a customer’s revenue-generation capabilities we come to what is really interesting from a business point of view for both the seller and the buyer, namely value for customers. In a later section of this chapter customer value will be discussed in some detail.

THE COST OF BAD SERVICE: LOST PREMIUM PRICING OPPORTUNITIES

If a firm offers low-quality service, or makes an offering where a physical product constitutes the core with additional low-quality service such as late deliveries, slow recovery of problems and unreliable maintenance processes, unnecessary relationship costs will be incurred by the customer. However, as is illustrated in Figure 6.5, if a firm’s service is high quality, relationship costs for the customer will correspondingly be low.

The less a potential customer thinks in terms of relationship costs and long-term sacrifice, the more important price will be as a decision-making criterion. However, there are firms who claim that they are able to price up to 10% and even 20% above market price. The reason for this is that these firms understand their customers and have been able to deliver an offering which keeps relationship costs at a minimum. Their service lowers any extra long-term costs of being a customer of this particular supplier or service provider. This provides the seller with a well-founded argument for selling his service at a higher price. The argument for a premium price is based on hard facts, i.e. cost savings. The trick is to learn how to calculate these costs and to teach customers to look for the impact of relationship costs on total long-term costs. The lower the relationship costs a firm can guarantee for a buyer, compared with competitors, the more opportunities exist for premium pricing.

If the additional long-term costs of bad service are not perceived by customers in a concrete way (based on facts, references and calculations) it will be difficult to make them pay for better service. In such cases, a lot of opportunities to earn money both for the buyer and for the seller are lost.

FIGURE 6.5

The relationship between service quality and relationship costs.

RELATIONSHIP COSTS FOR THE SUPPLIER

It is not only for the customer that poor service leads to unnecessary extra costs over time. As illustrated in Figure 6.6, the supplier receives a net price, after taking into account any discounts and terms of payment. According to the accounting systems of most firms, the margin between this net price and the cost of producing the solution for the customer is the direct economic result of the relationship. However, this is how it looks from a short-term, product-focused and transaction-oriented perspective.

From a customer relationship economics perspective the production costs, schematically illustrated in the lower part of Figure 6.6, are imaginary. The real cost of servicing a customer is much higher. To obtain the real cost of maintaining the relationship with a given customer, all other costs caused by the way the customer is served have to be added. Relationship costs occur for the supplier or service provider as well, and these costs decrease the gross margin between net price and production cost. If they add too much to production costs, what should be a good profit unexpectedly turns into a negative net profit. Because of the accounting systems used in many firms, management may not understand what causes this decrease in profit level.

Relationship costs for the supplier can be divided into the same types of costs as relationship costs for the customer. There are the direct relationship costs of maintaining a customer relationship caused, for example, by delivery systems, invoicing, complaints handling, technical service, customer training, etc., which the supplier uses. The more complicated, outdated and inefficient systems are and the more inappropriate the tools and equipment used, the higher the level of direct relationship costs will be for the supplier. Interestingly, the more inefficient, inappropriate and bureaucratic systems the supplier uses, the lower the level of service quality will be. Of course, the reverse also holds true.

FIGURE 6.6

Relationship costs for the supplier and their profit-destroying effects.
Source: Grönroos, C. (1992) Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum, 1992, p. 133.

There are also indirect relationship costs for the supplier in a relationship. Mistakes have to be corrected, complaints have to be attended to, inaccurate invoices have to be altered, problems have to be looked into, phone calls and e-mails have to be responded to, and so on. This leads to additional workload, the need for temporary employees, and possibly the need to employ more personnel, etc. All these costs are unnecessary and result from less than good service. These costs are also not easily detected and can be attributed to the fact that the firm does not take good care of its customers. However, firms should always have an account for the costs of bad service rendered, preferably specified per customer or at least customer group. If this account grows, management should perceive this as a warning signal. Finally, there are, of course, also psychological costs involved.

EXCELLENT SERVICE PAYS OFF TWICE: FOR BOTH PARTIES

The analysis of relationship costs for customers, suppliers and service providers clearly reveals that bad service causes problems and unnecessary costs for both parties. Moreover, it shows that by and large it is the same inefficient and untrustworthy service systems that lead to complicated procedures, service failures, quality problems and complaints, thus causing these extra and unnecessary costs. Improving service quality is, therefore, a win–win strategy in a customer relationship. Both parties will gain something to improve their profit margin. Good service pays off twice: for the supplier as well as the customer. This is illustrated in Table 6.1.

The supplier or service provider has an opportunity to raise prices above market price, and at the same time has considerable cost-saving opportunities, because improved service decreases additional relationship costs for the supplier. On the other hand, the customer can avoid substantial relationship costs if the service rendered is good. Moreover, if customers are satisfied with a given supplier or service provider and feel that they can trust the firm, and perceive that they get good value in the relationship, there is no need to look for alternative suppliers. Thus, the considerable search costs involved in changing supplier and start-up costs resulting from a new business relationship can be avoided. This does not, of course, mean that customers sometimes do not want to check alternative sources of goods and services, for example just out of interest or to check that their service supplier is keeping up-to-date with new technology. However, in a well-functioning relationship a trusted supplier or service provider frequently has the opportunity to upgrade its solutions to meet or exceed the standard that competitors are offering.

TABLE 6.1

Excellent service pays off twice: for both parties.

Benefits resulting from good service
For the supplier/service provider	For the customer
1. Opportunities to raise prices above the market price.	1. Decreasing costs of maintaining the relationship with the supplier.
2. Decreasing production costs.	2. No search or start-up costs of finding new supplier/service provider.

Source: Grönroos, C., Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum Assen, 1992, p. 139. Reproduced by permission of Van Gorcum, the Netherlands.

CUSTOMER PERCEIVED VALUE IN RELATIONSHIPS

Previous chapters discussed the perceived service quality concept and in this chapter customer perceived sacrifices have been analysed in terms of short-term sacrifice (price) and long-term sacrifice (relationship cost). In this and the next section we shall take the discussion one step further and analyse how customers perceive value in a relationship. As service is inherently relational, the value of a service offering will be discussed from a relationship perspective.¹¹ Such service offerings may include a service or a physical product as its core.

The starting point for understanding value is the observation that value is created and perceived by customers in their everyday activities and processes and in interactions with suppliers or service providers when consuming or making use of services, goods, information, personal contacts, recovery and other elements of ongoing relationships. Value emerges in the customer’s processes. Unlike normal management jargon and the traditional view in the management and marketing literature, value is not produced in a factory or in the back office of a service firm.¹² According to the conventional, production-oriented view, value for customers is embedded in the goods or services delivered to customers, and it materializes as value-in-exchange at the time of purchase. However, in reality there is no real value before the customer can make use of a product or a service. Only then value emerges as value-in-use for the customer in the customer’s processes.¹³ The role of the firm is to support a customer’s value creation.¹⁴ The firm provides the customer with resources and service processes, where interactions between the firm and the customer occur. In this way, on top of the customer’s creation of value, during direct interactions the firm also co-creates value with its customer.¹⁵ All this makes value a complicated concept to understand and manage. However, it is a concept that cannot be ignored.¹⁶ Here approaches to understanding customer perceived value in relationships will be discussed. Based on these approaches, value-destroying elements in a relationship can be detected and eliminated, value-enhancing elements can be spotted and reinforced, and ways of calculating perceived value can be developed.

First we present a ground model of customer perceived value:

The technical quality outcome (what) provided by a firm combined with the functional quality (how), i.e. how the service and relationship process contributes to the support to the customer’s processes, are related to the price paid and the additional relationship costs accruing over a given period of time. Sometimes all or parts of the customer perceived value can be calculated in monetary terms, sometimes it is only perceived in some way. In business-to-business relationships monetary value can always, in principle, be calculated, whereas it is mostly, but not always only, perceived by individual consumers and households.

In addition, customer perceived value (CPV) can be described by the following five equations:¹⁷

The five equations above describe the same value concept as the general model CPV0 from varying angles. By taking them all into account, one finds a deeper perception of how customers perceive value, which factors contribute to this value, and how value can be managed.

The first equation (CPV1) demonstrates that value is created by elements in singular episodes or service encounters as well as by perceptions of the relationship itself. This means that inherently value-creating elements exist in a relationship. Such relationship benefits may be a feeling of trust in a supplier or service provider, or social and technological bonds that have been established between the parties. The level of such benefits can, of course, be high or low, or somewhere in between, and may vary over time. The point is that such relationship benefits are perceived as true value-creating benefits and not as feelings. In a similar way, relationship sacrifice exists in an ongoing relationship. The customer realizes that some sacrifices are related to a given relationship. For example, being the customer of a certain bank may yield a lower rate of interest on deposits, but the customer may accept this because he trusts the bank and likes the personal attention paid to him (relationship benefits).

Every episode, service encounter or purchase of a physical product produces a benefit (episode benefit), and requires a sacrifice (episode sacrifice), normally in the form of a price to pay. However, the important thing here is that the value of one service encounter cannot be judged solely on the benefit and sacrifice related to that episode. The benefits and sacrifice involved in the whole relationship also contribute to the total perceived customer value.

The second equation (CPV2) illustrates the same thing as the previous one. The episode benefits and sacrifices constitute a value emerging from the transaction of the core solution – a physical product or a core service – whereas the relationship benefits and sacrifices constitute the value that emerges from the existence of the relationship itself. Hence, the total perceived value has a transaction value component and a relationship value component.

The third equation (CPV3) takes a different approach. Benefits for a customer are divided into two parts, the benefit of a core solution and of additional services. The core solution (a financial transaction, a production machine, or transportation from one place to another) is perceived on a per episode level. In quality terms, the core solution creates the perception of the outcome-related technical quality or what dimension. Additional services may be related to the episode, such as personal attention, deliveries or meals served during transportation. They may also be part of the continued relationship, such as information support, social calls, or recovery of quality problems or other types of mistakes. In quality terms, such additional services are perceived as the process-related functional quality or how dimension.

The denominator is divided into a price component, which is perceived in the short term, and a relationship cost component, which emerges over time as the relationship develops. The sum of price, including discounts and terms of payment, and relationship costs constitutes the total long-term costs or sacrifice in the relationship, and thus equals the sum of episode and relationship sacrifice (see CPV1).

Customer-perceived value can, of course, be improved by adding benefits; that is, by increasing the nominator of the equation. By providing a better core solution or new additional service, such as consulting services, a firm can improve its value perception in an ongoing customer relationship.¹⁸ However, it is equally important, and sometimes more important, to look at the denominator of the equation (CPV3). By decreasing the sacrifice perceived by a customer, the perceived value also improves.¹⁹ The interesting aspect of decreasing sacrifice is not related to the price component, which should not be lowered, but to the relationship cost component of the equation. By making it easier and more cost-effective for a customer to be involved with a supplier or service provider, it can also create a positive effect on customer perceived value. This kind of effect is often perceived in a favourable way by customers. In the next section we discuss this issue further in the context of the fourth customer-perceived value equation (CPV4).

The fifth equation (CPV5) is actually the same as the third one (CPV3). It indicates the economic effect of the total offering (core solution plus additional services), which should be calculated as the net present value of the total revenue-generating support over time attributable to a solution divided by the long-term sacrifice to get this revenue-generation support. From a business point of view this is the most important calculation of value for the customer. However, this requires that the level of revenues can be assessed or at least estimated over a relevant period of time, and that both direct and indirect relationship costs over the same period of time can be calculated at least in an approximate manner.

VALUE AND THE MANAGEMENT OF VALUE DESTROYERS

The fourth equation (CPV4) describing customer perceived value takes yet another approach to the phenomenon. Here value is divided into a core value part and an additional value part. The core value means the benefits of a core solution compared with the price paid for that solution. Additional value is created by additional service in the relationship compared with the relationship costs that occur over time.

The interesting thing to observe is the fact that the additional value component can be both positive and negative. (Compare the relationship value component in CPV2.) If it is positive, for example because of quick delivery, attentive and supportive service employees or smoothly handled service recovery, it contributes favourably to total perceived value. However, if additional service causes unnecessary or unexpected relationship costs, the effect of the added value component is negative. Thus it is not an added value, but a negative value-eroding component.

Negative additional value is created by complicated systems, non-user-friendly technology, unfriendly or unskilful employees, late deliveries, incorrect invoices, badly handled complaints, delayed maintenance of equipment, complicated equipment documentation, long queues to be served, etc. If such contacts and processes in the customer relationships are not managed as service but as administrative routines, or are focused on as internal efficiency only, their effect on customer-perceived value is normally destructive. Even an excellent core value is quickly destroyed by late deliveries, lack of proper support and delayed maintenance, or unfriendly and untrustworthy personnel and a lack of interest in service recovery. Elements in customer relationships – additional services in CPV3 – which are not managed as services for the customers, but as administrative routines or in some other customer-aversive fashion, may easily become value destroyers. Because they create problems, a bad impression and unnecessary extra costs for customers, they decrease the value of the core solution (core value).

‘Adding value’ has been a buzzword in management for a long time. However, firms seem to have problems in realizing which services are really valuable for customers and add to their perceived value, i.e. create additional value. ‘Added value’ is almost always treated as something extra or new that is created for customers.²⁰ However, adding new services to a relationship which already includes value destroyers does not make much sense, because these value destroyers spoil the core value of the solution. A much more effective way of adding value for customers is to improve what is already done for them, instead of creating something new. By turning customer contacts and processes which are treated as administrative routines, and therefore perhaps create unnecessary and unexpected relationship costs, into services for customers, by activating hidden services, relationship costs for the customers are eliminated or at least minimized. At the same time the quality of these customer contacts increases. The additional value component in CPV4 becomes positive and starts to contribute favourably to total customer perceived value.

Detecting processes and customer contacts in relationships which make the value of the core solution (core value) deteriorate and taking corrective action are essential management tasks. In this way customer-perceived value is improved and the customer relationship will be strengthened. When value destroyers have been removed, if necessary, new value-adding goods or services can be included. However, at that point such extras will probably not be needed any more. Hence, the trick is not to do new things for customers, primarily, but to improve what already exists in the customer relationship.

Managers should define value-creating elements in their customer relationships and, based on the customer perceived value equations discussed in this section, develop models that in monetary terms represent the worth of the supplier’s or service provider’s offerings to the customers.²¹ Without such models it may be difficult, or even impossible, to demonstrate to customers the value of a total service offering and how it develops over time.

QUANTIFYING THE VALUE OF A TOTAL SERVICE OFFERING

In order to quantify the value of a total service offering, the various features that distinguish a given offering from an existing one or from competing alternatives have to be explicitly demonstrated. Such offering features can be related to goods components, service components, or other components in the customer relationship, such as hidden services like complaints handling and invoicing. As is illustrated in Figure 6.7, both revenue and cost benefits as well as customer investments of each feature must be calculated for a relevant number of time periods (years, months or whatever is most appropriate).

Revenue benefits are sales increases that can be expected to be achieved if a customer chooses the offering. Cost benefits are cost savings that follow from the choice of the given offering. Both savings of direct and indirect relationship costs ought to be included and calculated. Customer investments are additional costs that customers have to accept in order to be able to use the offering. Such investments are normally direct relationship costs. Cost benefits are direct relationship costs that can be saved continuously over the whole relationship, whereas customer investments are extra direct costs that normally occur only at the start of the relationship. As the figure demonstrates, revenue benefits, cost benefits and customer investments have to be calculated for each offering feature for each time period. These figures can be calculated based on historical data, sales and revenue forecasts, and calculated anticipated cost effects of the features included. The total offering benefits for each period can be derived, and the net present value (NPV) of these total benefits over the whole time span can be calculated using an appropriate interest rate. The total offering benefits and their NPV offer a strong argument in planned marketing communication, development of offers and sales negotiations.

FIGURE 6.7

Value quantification of benefits of a total service offering.

Figure 6.8 shows an example of the quantification of the value of a component in ‘Salute’s Salvation’, a manufacturing process over a six-year time period, following the technological upgrading of a previous component (‘Salute’s Traditional’) where a competitor is offering a similar solution at a considerably lower price. The values in the figure represent changes from using the old technology.

Three major offering features of ‘Salute’s Salvation’ representing value-creating improvements are included. Two features are related to the manufacturing process of the customer – Goods feature 1: Multi-use process component and Service feature 1: Improved maintenance reliability.

One feature of the offering is related to changes in invoicing routines made by the supplier to make the previously highly internally-focused invoicing procedure a customer-centric service – Service feature 2: Monthly invoices specified by customer requirements.

The upgraded technology used in ‘Salute’s Salvation’ (Goods feature 1) makes it possible for the customer to manufacture several grades of its product without changing the component (the multiuse feature). This means that downtime decreases substantially, which can be forecasted to result in additional annual sales and revenues of 30 (annual revenue benefit in a currency and magnitude of the reader’s choice) over the six-year period (or any other relevant time span and scale). The upgraded technology also decreases costs for changing the component whenever a new product grade is manufactured in the process (thus diminishing direct relationship costs). The estimated annual cost savings, based on previous records, are 20 (annual cost benefit). The new technology requires substantial new skills among the employees involved in the process (additional direct relationship costs). Therefore, initial training costs have to be taken into account: 40 during year 1, 10 during year 2 and 0 during the following four years (annual customer investments).

FIGURE 6.8

Calculation of relationship benefits of a total service offering including goods, services and other components.

The new technology also adds improved maintenance reliability to ‘Salute’s Salvation’ (Service feature 1). The component requires substantially less maintenance, and the customer can take over follow-up maintenance. First of all, this means that even less downtime will occur, which will lead to additional annual sales and revenues of 20 (annual revenue benefit). Furthermore, improved maintenance reliability means lower maintenance costs (diminishing relationship costs including both a direct and an indirect portion), calculated to an annual amount of 15 (annual cost benefit). However, the customer will have to invest initially in employee training so that they learn how to handle maintenance-related tasks. These sums are calculated as 25 during year 1, 10 during year 2 and 0 thereafter, because newly hired employees are expected to be trained on the job by more experienced colleagues.

Because the relationship with this customer and others includes the regular shipment of materials in order to strengthen the relationship with its customers, the supplier has at the same time developed a new invoicing system, where the invoices are specified according to customer requirements. In addition, instead of sending an invoice for every shipment, which for larger customers may have meant several invoices per month, customers are now invoiced monthly only (Service feature 2: Monthly invoices specified by customer requirements). This is calculated to decrease the customers’ cost of handling documents (annual direct relationship cost) by 5 every year.

When the revenue and cost benefits are added up and the customer investments subtracted, the total offering benefits for each year can be assessed. In this example they are 25, 70, 90, 90, 90 and 90 for the six years studied. Using the customer’s normally applied interest rate, the NPV of the total benefits of the three new and distinguishing offering benefits can be calculated.

When this NPV is compared with a traditional solution and with the price savings offered by a competitor, the value of improved goods and service features can be put into perspective. A competing offering that does not offer these benefits will have to be priced considerably lower. Another consequence of a value quantification of a total service offering like the one illustrated here is that one can put a price on services. If the total benefits for the customer can be calculated in this way, it is possible to argue for the costs of the improved service that enables the customer to enjoy these benefits. Then a price increase which splits the total savings potential between the supplier and the customer may make sense.

CUSTOMER RELATIONSHIP PROFITABILITY

Offering good customer perceived value (as value-in-use) is critical, because good value will have a positive impact on customer loyalty, which in turn – through lower relationship costs and premium pricing opportunities – improves a customer’s contribution to the firm’s profit. However, value is, of course, not the only factor influencing profit. In the following sections a model of customer relationship profitability will be discussed, in order to help managers understand the mechanisms that make a customer profitable for a firm.

Analysing the profitability and profit contribution of customers and customer relationships is a problematic task in most firms, for individuals as well as for customer groups. Accounting systems are normally based on products, not customers. For a manufacturer of physical goods, it is possible to calculate revenues, costs, profits and even profitability per product and product group. In a service firm it is much more difficult to do the same, because of the difficulty of measuring and quantifying one unit of service. For both manufacturers and service firms it is almost impossible to find out information about revenues, costs, profits and profitability of customers or customer bases. Separate analysis almost always has to be done, and even then the information registered by the accounting system may not be enough.²² The tradition of registering cash flow, revenue and cost per product comes from the industrial era, when production was the major bottleneck. In the post-industrial era where customers, and employees, are the bottleneck, customer profitability and registration of cash flows, revenues and costs per customer is more important for strategic as well as tactical management.

Figure 6.9 illustrates a customer relationship profitability model.²³ This model helps managers to see the mechanisms that make customers more or less profitable. A quick glance at the model demonstrates that the road from customer perceived value to customer profitability includes a considerable number of factors, which are areas that have to be planned, managed and monitored if a positive contribution to profit is to be expected. The model is conceptual, and should help managers realize the complicated mechanisms that influence customer profitability. Some of the factors, such as perceived sacrifice, some customer–firm bonds, patronage concentration, relationship length, relationship revenue and relationship cost can be measured in an objective manner using metric scales. Other factors, such as perceived quality and value, satisfaction, commitment, some customer–firm bonds and relationship strength can only be measured using attitudinal scales and/or qualitative data. The objective here is not, however, to develop a calculation model, but to show the reader what to take into consideration and how to think.

The customer relationship profitability model includes four links as well as factors that influence these links. The four links are:

1. From customer perceived value to customer satisfaction.

2. From customer satisfaction to relationship strength.

   

   FIGURE 6.9

   The customer relationship profitability model: the mechanisms behind profitable customers.
   Source: Storbacka, K., Strandvik, T. & Grönroos, C., Managing customer relationship for profit: the dynamics of relationship quality. International Journal of Service Industry Management, 5(5); 1994: p. 23. Reproduced by permission of Emerald Insight.

3. From relationship strength to relationship length.

4. From relationship length to customer relationship profitability.

From value to satisfaction. As discussed earlier in this chapter, the total service offering includes core solutions and additional services. How the quality of this offering is perceived compared with the perceived sacrifice of customers, determines customers’ perceptions of the value of this offering and, in ongoing relationships, the value of the relationship. Customers are satisfied with perceived quality provided that the sacrifice involved – price and relationship costs – is not too high. Hence, perceived value determines customer satisfaction.

Customer satisfaction has an effect on two factors that have an impact on the next link in the model. Satisfied customers may become committed to the supplier or service provider, because they trust the other party or are pleased with the level of sacrifice involved in the relationship. Customer satisfaction also contributes to the formation of bonds between the two parties. Bonds (which can be social, cultural, ideological, psychological, knowledge-based, technological, geographical, time-related, legal or economic) (see the discussion of bonds in Chapter 4) tie customers to the supplier or service provider, because they make it easier, more comfortable or more economical for the customer to continue to patronize the same firm.

From satisfaction to relationship strength. The next link shows how satisfaction has a favourable effect on the strength of a relationship. Strong relationships can make customers loyal. Customer satisfaction has a direct impact on relationship strength. However, the effect also applies to customer commitments and bonds between the two parties. The more committed a customer is to a firm and the more bonds that exist between them, the stronger the relationship will be. The model does not say anything about what degree of satisfaction and commitment is required to create relationships of a certain strength, since this varies from case to case. It is important to bear in mind that the degree of satisfaction and commitment and perceived bonds often may have to be quite high to have a definite impact on relationship strength. For example, it seems that customers who claim that they are satisfied with a solution are not always loyal. The percentage of customers who make repeat purchases can be as low as 30% or even lower. However, customers who claim that they are very satisfied with a solution seem to have a much stronger relationship with the seller. The repurchase percentage may increase to 80% or above.

Strong relationships influence the number of alternative solutions that a customer considers. A high relationship strength can be expected to make the customer think less of alternatives to the existing relationship, and vice versa. In addition, a strong relationship will probably include fewer critical service encounters or episodes (unfavourable incidents). First, customers are satisfied with and feel committed to the relationship, because no or only a few unfavourable incidents have occurred. Second, a strong relationship can be expected to make critical episodes look less unfavourable, provided that such incidents do not occur too often.

From relationship strength to relationship length. In the third link, relationship strength has direct and indirect effects on the length of a relationship. The stronger the relationship, the longer it will last. Customers do not see incentives to stop doing business with the same supplier or service provider. At the same time, a strong relationship makes customers perceive that fewer alternatives exist, and this lack of alternatives has a positive effect on the length of a relationship. Also, a lack of perceived critical episodes has a similar influence.

Longer relationships can be expected to have a favourable effect on two factors, which are critical for customers’ contribution to profit. In continuing relationships, where customers are satisfied and feel strong ties to the other party, they can be expected to purchase more from this firm. A patronage concentration effect thus occurs. The supplier or service provider gets a ‘larger share of the customer’s wallet’. In ongoing relationships both parties also learn how to adjust to each other and how to collaborate so that the customer uses the offering in a more effective and personalized way. Fewer mistakes are made, so less recovery is needed. A more cost-efficient episode configuration should develop. Moreover, when there is a trusting enduring relationship, the firm can more easily suggest new ways of producing and using a service, moving to, for example, less expensive Internet-based contacts for information and payments. Hence, the service can be produced in a way that ties up less expensive resources without a perceived negative effect on quality and value.

From relationship length to relationship profitability. The final link shows how the length of a relationship influences the profitability of customer relationships. The length of a relationship by itself has a positive effect on profit, because costs of customer acquisition can be minimized and in many cases opportunities exist for premium pricing. A higher patronage concentration has a positive effect on the revenue streams in the relationship with any given customer. In addition, a more cost-efficient episode configuration, where unnecessary elements in relationships, such as answering customer questions and recovering service failures, can be avoided, and less expensive ways of performing a service can be introduced and accepted by customers, has a positive effect on relationship costs.

Hence, a stronger relationship can be expected to directly influence customer relationship profitability, and does this indirectly through improved revenue streams, higher relationship revenue, and more cost-efficient service processes and lower relationship costs.

If all favourable effects implied by the model occur, higher perceived service quality compared with customer sacrifice should lead to improved profitability in customer relationships. However, the links are not totally clear-cut; factors external to the model may influence some of the links or factors in an unexpected manner. A competitor who introduces a solution, for example, based on new technology, or who aggressively promotes a low price may change the links between the factors in the model. For example, a new much lower price option may make customers perceive episodes in existing relationships in a negative sense, because price may suddenly have become an issue. Or new technology offered by a competitor may untie a technology-based bond. In both cases, a new alternative may suddenly be considered realistic.

Managers must always follow up customer relationships, on individual relationship levels where possible, to monitor how the mechanisms in the model function. What can be measured using hard data should be measured. This requires that accounting systems are adjusted so that data on costs and revenues are available at a customer- or customer-base level. Factors that can be measured only by attitudinal measurement instruments or in other qualitative ways should also be monitored.

RECIPROCAL RETURN ON RELATIONSHIP

Relationship marketing is based on the idea that two (or several) actors, in the simplest case a supplier or service provider and its customer, are involved in a business engagement, where both parties should benefit from the relationship. A win–win situation should develop. It is, however, difficult to calculate the value of such a win–win situation. To understand this value the return on relationship (ROR) concept has been introduced. Relationships are reciprocal business engagements, and therefore, ROR should also be defined as a reciprocal concept. Grönroos and Helle define reciprocal ROR as follows:²⁴

Reciprocal return on relationship (RORR) is the long-term net financial outcome emerging for all parties resulting from the establishment and mutual maintenance of a relational business engagement.

Reciprocal return on relationship is an outcome of a mutual reciprocal process, and it can be calculated as a joint return on the relationship level as well as separately for the relationship parties. In Figure 6.10 the underpinning model for mutual value creation is illustrated.²⁵ Mutual value creation includes activities by the supplier and customer respectively with the common goal of creating value for themselves out of their business engagement. Some of these activities are performed by the parties without direct interactions with each other (activities in the provider and customer spheres; see Chapter 1 and Figure 1.5 about value spheres). Some activities are co-created in direct interactions between the supplier and customer (activities in the joint sphere; see Chapter 1 and Figure 1.5).

The model and corresponding calculations are easier to comprehend in a business-to-business context, but in principle the situation is the same in business-to-consumer relationships. As demonstrated by the figure, value emerges for both parties (and in a network, for several parties) based on the business configuration the parties agree upon and implement.

In the centre of the figure the provider’s and the customer’s everyday processes required to run their businesses are schematically illustrated. Which processes are central to a customer’s business and commercial process is, of course dependent on the context. As an example, in Figure 6.10 the following customer processes are considered central: order-making, warehousing, production (as an example of any type of core customer process to be supported), maintenance, information need, problem solving, and cost control. Because these processes are central to the customer’s business and commercial outcome, the supplier’s corresponding provider processes, needed to support these customer’s processes successfully, are order-taking, deliveries, product (as the core of the offering), maintenance, call centre, service recovery, and invoicing system.

After having assessed which the central processes on both sides are, the supplier and customer should engage in a process of innovating and aligning their processes, resources and competencies relating to these processes in order to find an optimal match between them. Because the provider and customer strive to match how they practise their processes, this is called practice matching.²⁶ As a result of the practice matching process the two parties adopt their processes to fit the other party’s corresponding processes. Who adopts its processes more depends on a number of factors: e.g. the power-dependence situation between the provider and customer, the strategies of the respective parties, and the perceived need to adopt. In the ideal case, both the provider and the customer adopt to reach an optimal match, which has the best possible effect on future revenues and costs for both.

FIGURE 6.10

The mutual value creation model.
Source: Adapted from Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and measurement of mutual gains from relational business engagements. Journal of Business & Industrial Marketing, 27(5); 2012: 348. Reproduced by permission of Emerald Insight.

In the next phase, the implications of the matched processes for the customer’s and firm’s processes are assessed and calculated. The improved practice efficiency following the use of the renewed processes is calculated as a technical value effect. The technical value improvement can normally be measured in volumes (e.g. production volume per time unit; amount of scrap), quality (e.g. the technical quality of a production output), time (the standstill time caused by maintenance need or problem recovery), or other units.

Finally, the business effectiveness of the new way of maintaining the relationship should be calculated in monetary terms, which gives decision-makers a financial value effect of the new way of operating in the relationship measured. This means that the changes in the technical value due to the practice matching process are transformed into monetary revenue effects and cost effects. Revenue effects following from, for example, growth or premium pricing opportunities can only be projected, whereas real cost effects, for example cost savings or required additional costs in the various processes, can be calculated using real data, for example by applying activity-based costing (ABC).

In addition to the monetary value effects, there are also value perceptions which should often be considered. The parties may feel more comfortable with doing business with each other, find it easier to collaborate, and a growing level of trust and commitment may develop.

It is not self-evident that such practice matching processes and corresponding efficiency and effectiveness calculations can be undertaken. It requires a certain amount of trust between the parties to reveal their processes and, to make the monetary calculations, to open their books and show their cost and revenue drivers, and business models. However, when firms enter into such a process, they normally find it worthwhile.

Next, the way of calculating reciprocal return on relationship (RORR) is described.²⁷ The process is illustrated in Figure 6.11, and the corresponding calculations are shown in the case study at the end of this section.

The whole process includes six steps:

1. Adopting a service perspective.

2. Practice matching.

3. Joint productivity gain calculation.

   

   FIGURE 6.11

   The reciprocal return-on-relationship assessment process.
   Source: Adapted from Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and measurement of mutual gains from relational business engagements. Journal of Business & Industrial Marketing, 27(5); 2012: 350. Reproduced by permission of Emerald Insight.

4. Incremental value assessment.

5. Value sharing.

6. Calculating the reciprocal and separate return on relationship (ROR_R, ROR_P, ROR_C).

The first step for the supplier, or any service provider, is to strategically adopt a service perspective (service logic) in the management of the relationship, and set out to develop an offering which aims to support the customer’s processes (practice efficiency) and, in the end, the customer’s commercial and business goals (business effectiveness) in a value creating way. Without this service intention to support the other party’s processes it will be difficult to get the process going.

The second step is to fulfil the practice matching requirement where the two parties go through the practice matching process and create appropriate process, resource and competence adjustment. Then cost effects for both the customer and the provider and projected revenue effects for the customer, following the new way of operating the relationship based on the practice matching, are calculated. The revenue effect for the provider is taken into account later, through a pricing mechanism, in the value sharing phase (the fifth phase).

The third step is to calculate the joint productivity gain of the renewal of the processes on both sides and the related new way of managing and operating the relationship. Firms in a relational business engagement which set out to develop the relationship together can often be expected to gain more than if the parties act independently.²⁸ ‘Joint productivity’ as an idea and concept was introduced and defined by Pekka Helle.²⁹ This concept is based on the service productivity concept (see Chapter 7), and means that instead of calculating productivity and productivity changes for providers and customers separately, the effects on revenues and costs which constitute productivity are pooled and calculated jointly. It turns out that this triggers new ways of operating for the two parties in a business relationship and enables new pricing models. As a consequence, the return on the relationship for both parties can improve even dramatically, as shown later in this chapter in the case study involving reciprocal return on relationship calculations.

The fourth step in the model is to assess the incremental value emerging from the joint productivity gain calculation. This means that one monetary value of the new proposed way of doing business is calculated by pooling the cost and revenue effects for the parties calculated in the previous phase (cost effects for both parties; revenue effect for the customer). This is the increase of the value of the relationship as such, without splitting it between the parties involved. It reflects the total value increase following the new way of managing and operating the relationship. In practice, this and the previous phase are intertwined.

The fifth step is the value sharing phase, where the incremental value calculated in the previous step is shared. In practice this involves price negotiations between the parties, where it is decided how the incremental value is shared between the provider and the customer. For example, a higher price means that the provider gets a larger share of the incremental value gain.

In the sixth and final step the return on relationship is calculated as a ROR_C for the customer and a ROR_P for the provider, and as a reciprocal ROR_R for the relationship as such:

In the case illustration which concludes this section, the six-step procedure and corresponding calculations will be illustrated.

Bigger firms engaged in close and ongoing relationships can probably benefit more than others from joint business development as suggested here. Moreover, firms which become intertwined with their customers in terms of roles, activities and perceived risks probably also benefit more. Also, firms that are innovative in their customer relationships and strive to determine their own markets may also find this approach beneficial. Industry innovators that do not restrict their business performance to existing offering constellations and market definitions will probably also find this kind of reciprocal relationship approach useful. Dynamic and uncertain business environments may also be supportive. On the other hand, if firms perceive a risk of opportunistic behaviour by the other party in a relationship, the willingness to engage in this type of business may decrease.

CUSTOMER EQUITY MANAGEMENT

Rust et al.³⁰ have introduced a model for the management of customer profitability, which can be labelled a customer equity management model. They define customer equity as ‘the total of the discounted lifetime values over all the firm’s customers’.³¹ This more or less equals the profitability of a firm’s customer base. The model has three components. Depending on the effect on customers’ purchasing and consumption behaviour of each of these components, the customers decide to give more or less of their business to the firm, and thus form a more or less profitable customer base for the firm. The three components are:³²

1. Value equity. The end customer’s perception of value from the product.

2. Brand equity. The end customer’s emotional and subjective assessment about the value of the brand.

3. Retention equity. The end customer’s repeat purchase intention and loyalty towards the supplier.

According to this model, value for customers is derived from two sources – the product (a good or a service) itself and the perception of the brand. If the product functions well for the customer, he can capture a basic value from the use of the product (value equity). If he considers the product to own additional emotionally and subjectively felt qualities caused by the brand image of this product, this provides additional value support (brand equity). Both these components make the customer buy from the supplier of this product and thus generate cash flow for the firm. In addition, if the customer has a willingness to stay loyal to the firm and continue buying this product from it, the firm gets additional cash flow over time (retention equity).³³ Rust and his colleagues provide metrics to use for calculation of customer equity, using this three-component model, but when planning how to create a profitable customer base the model also functions as a conceptual support for marketers.

THE VALUE OF CUSTOMERS

Finally, firms should know the long-term value of their individual customers. The lifetime value of customers should be calculated. When managers have such information they realize that long-term customer relationships are valuable assets. It also helps marketers to realize the importance of keeping existing customers.

The calculation of customers’ value should be based on information on customers’ current contribution to net profit, not sales figures.³⁴ For each customer, or for customer groups, the direct costs of producing an offering, including relationship costs occurring for the seller, are deducted from revenues from this customer. What remains after this deduction, the net profit from a customer, should cover the firm’s fixed costs.

A customer’s contribution to net profit may vary substantially over the life of the relationship. New customers may be unprofitable or their profit contribution may be low, whereas long-standing customers frequently become more profitable as the relationship continues. Such considerations have to be taken into account when calculating the long-term profit contribution of customers. Therefore, it is essential that managers gain as much insight as possible into typical customer life cycles.³⁵

The lifetime value of a customer relationship or, when individual figures cannot be obtained, the lifetime value of a relationship with a given customer group can be calculated as the net present value of the net profits that can be expected over the years. This lifetime value shows how important each customer is to a supplier or service provider. If such figures are not calculated, the value of existing customers will not be fully appreciated, and the loss of value that follows from departing customers will not be understood. By calculating the lifetime value of customers, managers obtain information on which customer relationships are critical to the firm, which are contributing less to total profitability, and which are not profitable. However, one should always remember that customers who are not profitable at a given time may become profitable in the future, for example as a result of a different episode configuration, increasing disposable income or changing needs.

NOTES

1.  Pickworth, J.R., Minding the Ps and Qs: linking quality and productivity. The Cornell Hotel and Restaurant Administration Quarterly, May, 1987.

2.  Crosby, P.B., Quality is Free. New York: McGraw-Hill, 1979.

3.  Customer satisfaction studies frequently demonstrate a clear relationship between customer satisfaction and retention. See, for example, Rust, R.T., Zahorik, A.J. & Keiningham, T.L., Return on Quality: Measuring the Financial Impact of Your Company’s Quest for Quality. Chicago, IL: Richard D. Irwin, 1994 and Anderson, E.W. & Sullivan, M.W., The antecedents and consequences of customer satisfaction for firms. Marketing Science, 12(Spring), 1993, 125–143. One should, however, remember that there are clear indications that this relationship is often only positive if customers are very satisfied and not merely satisfied. In a business-to-business context, Venetis and Ghauri demonstrate that service quality has a positive impact on customer retention. See Venetis, K.A. & Ghauri, P.N., Service quality and customer retention: building long-term relationships. European Journal of Marketing, 38(11–12), 2004, 1577–1588. See also Bell, S.J., Auh, S. & Smalley, K., Customer relationship dynamics: service quality and customer loyalty in the context of varying levels of customer expertise and switching costs. Journal of the Academy of Marketing Science, 33(2), 2005, 169–183 and Keiningham, T.L., Cooil, B., Aksol, L., Andreassen, T.W. & Weiner, J., The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet. Managing Service Quality, 17(4), 2007, 361–384.

4.  Hart, C.W. & Johnson, M.D., Growing the trust relationship. Marketing Management, Spring, 1999, 9–19.

5.  Hart & Johnson, op. cit.

6.  See Keiningham, T.L., Aksoy, L., Malthouse, E.C., Lariviere, B. & Buoye, A., The cumulative effect of discrete transactions on share of wallet. Journal of Service Management, 25(3), 2014, 310–333.

7.  See Reichheld, F.F., The Loyalty Effect. The Hidden Force Behind Growth, Profits and Lasting Value. Boston, MA: Harvard Business School Press, 1996.

8.  Reichheld, F.F. & Sasser Jr., W.E., Zero defections: quality comes to services. Harvard Business Review, Sept–Oct, 1990, 105–111. Similar results from another study are reported in Heskett, J.L., Sasser Jr., W.E. & Schlesinger, L.A., The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value. New York: The Free Press, 1997.

9.  Grönroos, C., Service Management and Marketing. Managing the Moments of Truth in Service Competition. Lexington, MA: Lexington, Books, 1990.

10.  Grönroos, C., Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum, 1992, pp. 129–140.

11.  Value perception and value formation in relationships have not yet been studied to any considerable extent. See, for example, Ravald, A. & Grönroos, C., The value concept and relationship marketing. European Journal of Marketing, 30(2), 1996, 19–30 and Lapierre, J., What does value mean in business-to-business professional services? International Journal of Service Industry Management, 8(5), 1997, 377–397. For excellent overviews, see Payne, A. & Holt, S., Review of the ‘value’ literature and implications for relationship marketing. Australasian Marketing Journal, 7(1), 1999, 41–51 and Tzokas, N. & Saren, M., Value transformation in relationship marketing. Australasian Marketing Journal, 7(1), 1999, 52–62. See also Hennig-Thurau, T., Gwinner, K.P. & Gremler, D.D., Understanding relationship marketing outcomes. An integration of relationship benefits and relationship quality. Journal of Service Research, 4(3), 2002, 230–247.

12.  Normann, R., Reframing Business. When the Map Changes the Landscape. Chichester, UK: John Wiley & Sons, 2001 and Storbacka, K. & Lehtinen, J.R., Customer Relationship Management. Singapore: McGraw-Hill, 2001. See also Normann, R. & Ramírez, R., From value chain to value constellation: designing interactive strategy. Harvard Business Review, July–Aug, 1993, 65–77 and Wikström, S., Value creation by company–consumer interaction. Journal of Marketing Management, 12, 1996, 359–374. This is, of course, not an entirely new observation. Theodore Levitt expressed this point of view in the 1980s by noticing that value can only reside in the benefits of customer needs or expectations and that, therefore, only the customer can assign value to a physical product or a service. See Levitt, T., The Marketing Imagination. New York: The Free Press, 1986. By and large, Levitt’s observation went unnoticed, or received only marginal interest, by practitioners as well as academics.

13.  Vargo, S.L. & Lusch, R.F., Evolving to a new dominant logic for marketing. Journal of Marketing, 68(Jan), 2004, 1–17. See also Woodruff, R.B. & Gardial, S., Know Your Customers – new approaches to understanding customer value and satisfaction. Oxford: Blackwell Publishers, 1996.

14.  Grönroos, C. & Voima, P., Critical service logic: making sense of value creation and co-creation. Journal of the Academy of Marketing Science, 41(2), 2013, 133–150. See also Grönroos, C., What can a service logic offer marketing theory? In Lusch, R.F. & Vargo, S.L. (eds), A Service-Dominant Logic in Marketing. Dialog. Armonk, NY: M.E. Sharpe, 2006, pp. 354–364.

15.  Grönroos & Voima, op. cit. See also Prahalad, C.K. & Ramaswamy, V., The Future of Competition: Co-Creating Unique Value with Customers. Boston, MA: Harvard Business School Press, 2004, who discuss the idea of value co-creation, and Wikström, op. cit.

16.  Wilson, D.T. & Jantrania, S., Understanding the value of a relationship. Asia-Australia Marketing Journal, 2(1), 1994, 55–66 and Tzokas & Sarin, op. cit. Wilson and Jantrania offer a comprehensive discussion of the value concept.

17.  Ravald & Grönroos, op. cit. and Grönroos, C., Value-driven relational marketing: from products to resources and competencies. Journal of Marketing Management, 13(5), 1997, 407–419.

18.  In a recent study, Dimitriadis, S. & Koritos, C., Core service versus relational benefits: what matters most? The Service Industries Journal, 34(13–14), 2014, 1092–1112, the authors found that additional relational benefits are appreciated by customers, but they also found that the role of the core service may dominate over additional benefits in the customers’ value perception. The relationship between the importance of the core service and benefits provided by additional services is to some extent controversial.

19.  As Christopher Lovelock observes, ‘creating value requires rigorous analysis of all possibilities on both the cost and benefit sides of the equation’ (p. 61). See Lovelock, C.H., Product Plus: How Product + Service = Competitive Advantage. New York: McGraw-Hill, 1994.

20.  As Anderson and Narus observe, ‘instead of tailoring their packages of services to customers’ individual needs . . . many suppliers simply add layer upon layer of services to their offerings’ (p. 75). By doing so they do not necessarily create more real value for their customers. See Anderson, J.C. & Narus, J.A., Capturing the value of supplementary services. Harvard Business Review, 73(Jan–Feb), 1995, 75–83.

21.  See Anderson, J.C. & Narus, J.A., Business marketing: understand what customers value. Harvard Business Review, 76(Nov–Dec), 1998, 53–61. They call such models customer value models.

22.  Storbacka, K., The Nature of Customer Relationship Profitability. Helsinki/Helsingfors: Swedish School of Economics, Finland/CERS, 1994.

23.  Storbacka, K., Strandvik, T. & Grönroos, C., Managing customer relationships for profit: the dynamics of relationship quality. International Journal of Service Industry Management, 5(5), 1994, 21–38.

24.  The definition is based on Grönroos, C. & Helle, P., Return on relationships: conceptual understanding and measurement of mutual gains from relational business engagements. Journal of Business & Industrial Marketing, 27(5), 2012, 344–359. The first scholar to present a definition of ROR was Evert Gummesson, whose definition, however, only implicitly includes the reciprocity aspect of relationships. See Gummesson, E., Total Relationship Marketing. Marketing Management, Relationship Strategy, CRM, and a New Dominant Logic for the Value-creating Network Economy. Oxford: Butterworth Heinemann, 2008, p. 257.

25.  The mutual value creation model is introduced in Grönroos & Helle, 2012, op. cit. Figure 6.10 and the explanation of the model are adapted from Grönroos & Helle, 2012, op. cit., and Helle, P., Re-conceptualizing value creation: from industrial business logic to service business logic. Working Paper 554. Helsinki: Hanken School of Economics, Finland, 2011.

26.  Grönroos, C. & Helle, P., Adopting a service logic in manufacturing: conceptual foundation and metrics for mutual value creation. Journal of Service Management, (21)5, 2010, 564–590. See also Russo-Spena, T. & Mele, C., ‘Five co-s’ in innovating: a practice-based view. Journal of Service Management, 23(4), 2012, 527–553.

27.  The reciprocal return on relationship process and Figure 6.11 are adapted from Grönroos & Helle, 2012, op. cit.

28.  Compare also Jap, S., Pie-expansion efforts: collaboration processes in buyer-seller relationships. Journal of Market Research, (36)4, 1999, 461–475.

29.  Helle, P., Towards understanding value creation from the point of view of service provision. Conference report. EIASM Service Marketing Forum, Capri, 2009. See also Helle, op. cit. and Grönroos & Helle, op. cit.

30.  Rust, R.T., Zeithaml, V.A. & Lemon, K.N., Customer Equity Management. Englewood Cliffs, NJ: Prentice Hall, 2004.

31.  Rust, Zeithaml & Lemon, op. cit., p. 4.

32.  In the original version of the model ‘relationship equity’ was used instead of ‘retention equity’. See Rust, R.T., Zeithaml, V.A. & Lemon, K.N., Driving Customer Equity: How Customer Lifetime Value is Reshaping Corporate Strategy. New York: The Free Press, 2000.

33.  It is interesting to notice the resemblance between this three-component customer equity management model and the logic underpinning the second customer perceived quality equation (CPV2) discussed earlier in this chapter. Value equity equals the transaction value component in CPV2, whereas the relationship value component in CPV2 is divided into two components – brand equity and retention equity.

34.  Rust, R.T., Zahorik, A.J. & Keiningham, T.L., Return on Quality (ROQ): making service quality financially accountable. Journal of Marketing, 59(Apr), 1995, 58–70.

35.  Stauss, B. & Friege, C., Regaining service customers: costs and benefits of regain management. Journal of Service Research, 1(4), 1999, 347–361.

36.  See Storbacka, 1994, op. cit. and Storbacka, K., Customer profitability: analysis and design issues. In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing. Thousand Oaks, CA: Sage Publications, 2000, pp. 565–586.

37.  This case was developed by Dr Kaj Storbacka, professor at The University of Auckland Business School and former research director of CERS (Centre for Relationship Marketing and Service Management) at Hanken Swedish School of Economics, Finland, based on his research on customer relationship profitability and his consultancy experience.

FURTHER READING

Anderson, J.C. & Narus, J.A. (1995) Capturing the value of supplementary services. Harvard Business Review, 73(Jan/Feb), 75–83.

Anderson, J.C. & Narus, J.A. (1998) Business marketing: understand what customers value. Harvard Business Review, 76(Nov/Dec), 53–61.

Anderson, E.W. & Sullivan, M.W. (1993) The antecedents and consequences of customer satisfaction for firms. Marketing Science, 12(Spring), 125–143.

Bell, S.J., Auh, S. & Smalley, K. (2005) Customer relationship dynamics: service quality and customer loyalty in the context of varying levels of customer expertise and switching costs. Journal of the Academy of Marketing Science, 33(2), 169–183.

Crosby, P.B. (1979) Quality is Free. New York: McGraw-Hill.

Dimitriadis, S. & Koritos, C. (2014) Core service versus relational benefits: what matters most? The Service Industries Journal, 34(13–14), 1092–1112.

Grönroos, C. (1990) Service Management and Marketing. Managing the Moments of Truth in Service Competition. Lexington, MA: Lexington Books.

Grönroos, C. (1992) Facing the challenge of service competition: the economies of service. In Kunst, P. & Lemmink, J. (eds), Quality Management in Services. Maastricht, the Netherlands: Van Gorcum Assen, pp. 129–140.

Grönroos, C. (1997) Value-driven relational marketing: from products to resources and competencies. Journal of Marketing Management, 13(5), 407–419.

Grönroos, C. (2006) What can a service logic offer marketing theory? In Lusch, R.F. & Vargo, S.L. (eds), A Service-Dominant Logic in Marketing. Dialog, Armonk, NY: M.E. Sharpe, pp. 354–364.

Grönroos, C. & Helle, P. (2010) Adopting a service logic in manufacturing: conceptual foundation and metrics for mutual value creation. Journal of Service Management, 21(5), 564–590.

Grönroos, C. & Helle, P. (2012) Return on relationships: conceptual understanding and measurement of mutual gains from relational business engagements. Journal of Business & Industrial Marketing, 27(5), 344–359.

Grönroos, C. & Voima, P. (2013) Critical service logic: making sense of value creation and co-creation. Journal of the Academy of Marketing Science, 41(2), 133–150.

Gummesson, E. (2008) Total Relationship Marketing. Marketing Management, Relationship Strategy, CRM, and a New Dominant Logic for the Value-creating Network Economy. Oxford: Butterworth Heinemann.

Hart, C.W. & Johnson, M.D. (1999) Growing the trust relationship. Marketing Management, Spring, 9–19.

Helle, P. (2009) Towards understanding value creation from the point of view of service provision. Conference report. EIASM Service Marketing Forum, Capri.

Helle, P. (2011) Re-conceptualizing value creation: from industrial business logic to service business logic. Working Paper 554. Helsinki: Hanken School of Economics, Finland, Helsinki.

Hennig-Thurau, T., Gwinner, K.P. & Gremler, D.D. (2002) Understanding relationship marketing outcomes. An integration of relationship benefits and relationship quality. Journal of Service Research, 4(3), 230–247.

Heskett, J.L., Sasser Jr., W.E. & Schlesinger, L.A. (1997) The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value. New York: The Free Press.

Keiningham, T.L., Aksoy, L., Malthouse, E.C., Lariviere, B. & Buoye, A. (2014) The cumulative effect of discrete transactions on share of wallet. Journal of Service Management, 25(3), 310–333.

Keiningham, T.L., Cooil, B., Aksol, L., Andreassen, T.W. & Weiner, J. (2007) The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet. Managing Service Quality, 17(4), 361–384.

Lapierre, J. (1997) What does value mean in business-to-business professional services? International Journal of Service Industry Management, 8(5), 377–397.

Levitt, T. (1986) The Marketing Imagination. New York: The Free Press.

Lovelock, C.H. (1994) Product Plus: How Product + Service = Competitive Advantage. New York: McGraw-Hill.

Normann, R. (2001) Reframing Business. When the Map Changes the Landscape. Chichester, UK: John Wiley & Sons.

Normann, R. & Ramirez, R. (1993) From value chain to value constellation: designing interactive strategy. Harvard Business Review, Jul–Aug, 65–77.

Payne, A. & Holt, S. (1999) Review of the ‘value’ literature and implications for relationship marketing. Australasian Marketing Journal, 7(1), 41–51.

Pickworth, J.R. (1987) Minding the Ps and Qs: linking quality and productivity. The Cornell Hotel and Restaurant Administration Quarterly, May.

Prahalad, C.K. & Ramaswamy, V. (2004) The Future of Competition: Co-Creating Unique Value with Customers. Boston, MA: Harvard Business School Press.

Ravald, A. & Grönroos, C. (1996) The value concept and relationship marketing. European Journal of Marketing, 30(2), 19–30.

Reichheld, F.F. (1996) The Loyalty Effect. The Hidden Force Behind Growth, Profits and Lasting Value. Boston, MA: Harvard Business School Press.

Reichheld, F.F. & Sasser Jr., W.E. (1990) Zero defections: quality comes to services. Harvard Business Review, Sept–Oct, 105–111.

Russo-Spena, T. & Mele, C. (2012), ‘Five co-s’ in innovating: a practice-based view. Journal of Service Management, 23(4), 527–553.

Rust, R.T., Zahorik, A.J. & Keiningham, T.L. (1995) Return on Quality (ROQ): making service quality financially accountable. Journal of Marketing, 59(Apr), 58–70.

Rust, R.T., Zeithaml, V.A. & Lemon, K.N. (2000) Driving Customer Equity: How Customer Lifetime Value is Reshaping Corporate Strategy. New York: The Free Press.

Rust, R.T., Zeithaml, V.A. & Lemon, K.N. (2004) Customer Equity Management. Englewood Cliffs, NJ: Prentice Hall.

Stauss, B. & Friege, C. (1999) Regaining service customers. Costs and benefits of regain management. Journal of Service Research, 1(4), 347–361.

Storbacka, K. (1994) The Nature of Customer Relationship Profitability. Helsinki/Helsingfors: Hanken Swedish School of Economics, Finland/CERS Centre for Relationship Marketing and Service Management.

Storbacka, K. (1997) Segmentation based on customer profitability – retrospective analysis of retail bank customer bases. Journal of Marketing Management, 13(5), 479–492.

Storbacka, K. (2000) Customer profitability: analysis and design issues. In Sheth, J.N. & Parvatiyar, A. (eds), Handbook of Relationship Marketing. Thousand Oaks, CA: Sage Publications, pp. 565–586.

Storbacka, K. and Lehtinen, J.R. (2001) Customer Relationship Management. Singapore: McGraw-Hill.

Storbacka, K., Strandvik, T. & Grönroos, C. (1994) Managing customer relationships for profit: the dynamics of relationship quality. International Journal of Service Industry Management, 5(5), 21–38.

Tzokas, N. & Saren, M. (1999) Value transformation in relationship marketing. Australasian Marketing Journal, 7(1), 52–62.

Vargo, S.L. and Lusch, R.F. (2004) Evolving to a new dominant logic for marketing. Journal of Marketing, 68(Jan), 1–17.

Venetis, K.A. & Ghauri, P.N. (2004) Service quality and customer retention: building long-term relationships. European Journal of Marketing, 38(11–12), 1577–1588.

Wikström, S. (1996) Value creation by company–consumer interaction. Journal of Marketing Management, 12, 359–374.

Wilson, D.T. & Jantrania, S. (1994) Understanding the value of a relationship. Asia-Australia Marketing Journal, 2(1), 55–66.

Woodruff, R.B. & Gardial, S. (1996) Know Your Customers – New Approaches to Understanding Customer Value and Satisfaction. Oxford: Blackwell Publishers.